Question

Domino company ages its accounts receivable to estimate bad debts expense. Domino began year 2 with balances in accounts receivable and allowance for doubtful accounts of $47,850 and $3800, respectively. During year 2, the company wrote off $2820 in uncollectible accounts. In preparation for the company's estimate of bad debts expense for year 2, Domino prepared the following aging schedule:

Number of days past due Receivables amount % likely to be uncollectible
Current $82,000 1%
0-30 $29,500 5%
31-60 $7960 10%
61-90 $4220 25%
Over 90 $3900 50%
Total $127,580

What amount will be reported as bad debts expense on the year 2 income statement?
1) $2820
2) None of the above
3) $6096
4) $2296
5) $5116

Answer 1

The bad debts expense for Domino's year 2 income statement is estimated to be $6,096, which is obtained by applying the given percentages to the respective receivables amounts and summing them up.

Step-by-step explanation:

To estimate the bad debts expense for Domino's year 2, we'll need to apply the given percentages to the balance in each aging category and then sum these amounts. We should not include the amounts written off already ($2820) directly, as the bad debt expense is an estimate of future uncollectible debts, not the debts already deemed uncollectible.

• Current: $82,000 x 1% = $820
• 0-30 days: $29,500 x 5% = $1,475
• 31-60 days: $7,960 x 10% = $796
• 61-90 days: $4,220 x 25% = $1,055
• Over 90 days: $3,900 x 50% = $1,950

The total estimated uncollectible amount is $820 + $1,475 + $796 + $1,055 + $1,950 = $6,096.

This amount, $6,096, will be reported as the bad debts expense on the year 2 income statement (Choice 3).